There are two types of organizations. Those that seek to constantly innovate, and those that seek to exploit their existing assets. Neither organization is better than the other. In fact, as organizations develop and age, their ways/methods naturally become more set in stone. They start following algorithms, instead of innovating. As a result they become more efficient at certain tasks and become more profitable. But, the unintended consequence is that they lose the culture required to drive innovation.

Proctor & Gamble is a great example. They have brand marketing down to a science. Their experience in rolling out consumer goods is unmatched. But, their ability to innovate in R&D declined over the years. Innovation is not algorithmic. To counteract this decline, they decided to take a completely different approach than you might expect. Instead of throwing tons of additional money into R&D and rebuild their culture, they now look to outside sources for innovation. If you have a great consumer goods product idea, they'll develop it and market it. They realized it was easier to let others do the innovating.

Pfizer does the same thing. Smaller innovation companies find new uses for drugs, and pfizer markets them. It allows them to focus on what they do best, and take advantage of the other company's culture of innovation.

This is in contrast to Microsoft, who has yet to develop a system of innovation that works. They struggle because any new innovation can be undermined if it threatens an existing business unit. And their existing business units are so focused on maximizing profits, and protecting marketshare that they inadvertently stifle innovation at the most basic level. To the business unit managers it's about self-preservation, but it hurts their long term prospects.

Dick Brass explained it thusly in a recent editorial in the NY Times.

When we were building the tablet PC in 2001, the vice president in charge of Office at the time decided he didn’t like the concept. The tablet required a stylus, and he much preferred keyboards to pens and thought our efforts doomed. To guarantee they were, he refused to modify the popular Office applications to work properly with the tablet. So if you wanted to enter a number into a spreadsheet or correct a word in an e-mail message, you had to write it in a special pop-up box, which then transferred the information to Office. Annoying, clumsy and slow.

The difference between Microsoft & P&G is simple. It's not that Microsoft they can't innovate, it's that there is a systemic bias that squashes innovation at it's earliest stages. Until that system changes, Microsoft will continue to struggle with bringing innovations to market.